Chapter 1

Question 1

Supply of credit

Answer 1

Through which we can borrow funds to supplement our

incomes and support our standard of living.

Question 2

Reservoir of savings

Answer 2

Through which we can set aside financial reserves
to draw upon for a “rainy day,” placing those savings in attractive financial instruments until the day arrives when we need extra funds.

Question 3

Transformation of savings into investment

Answer 3

Such as the building of new facilities, the acquisition of equipment, stocking shelves with goods to purchase, so that we can find jobs and enjoy decent living standards.

Question 4

Mechanism for making payments

Answer 4

Provides a channel so we can make purchases of goods and services, settle what we owe, so that spendable funds
move smoothly and reliably between buyers and sellers.

Question 5

Creation of liquidity

Answer 5

Ensures that we have spendable funds exactly when they are needed, usually by converting the assets we hold (especially stocks, bonds, and similar financial instruments) into immediately spendable funds.

Question 6

Provision of risk protection

Answer 6

In the form of insurance policies, derivative contracts, and other relatively inexpensive services that may shield us from excessive losses.

Question 7

Channel for the pursuit of public policy

Answer 7

Permits governments and central banks to apply the tools they possess to stabilize the economy and financial system, pursuing such goals as maximum employment, price stability (absence of serious inflation), and sustainable
economic growth.

Question 8

Key financial-service firms that collapsed

Answer 8

AIG, Bear Stearns, Goldman Sachs, Lehman Brothers, and Merrill Lynch

Question 9

Financial system

Answer 9

The collection of markets, institutions, laws, regulations, and techniques through which bonds, stocks, and other
securities are traded; interest rates are determined; and financial services are produced and delivered around the world.

Question 10

Financial system, primary task?

Answer 10

To move scarce loanable funds from those who save to those who borrow to buy goods and services and to make investments in new equipment and facilities so that the global economy can grow and increase the standard of living enjoyed by its citizens.

Question 11

Basic function of the global economic system

Answer 11

Allocate scarce resources—land, labor, management skill, and capital—to their most highly valued use, producing the goods and services needed by society.

Question 12

Circular flow

Answer 12

Flows of payments and production within the global economic system between producing units (mainly businesses and governments) and consuming units (principally households).

Question 13

Most of the national income generated by the economy—which averaged more than $12 trillion in 2009—is spent on

Answer 13

Consumption of goods and services, the remainder is saved

Question 14

What is a market?

Answer 14

It is an institution through which buyers and sellers meet to exchange goods, services, and productive resources.

Question 15

Why is the marketplace dynamic?

Answer 15

It must respond continuously not only to changes in

consumers’ tastes, but also to the introduction of new goods and services, often associated with new technology.

Question 16

Three types of markets

Answer 16

Factor, product, and financial.

Question 17

What is a factor market?

Answer 17

Allocate factors of production—land, labor, managerial skills, and capital—and distribute income—wages, salaries,
rental payments, and so on—to the owners of productive resources.

Question 18

What is a product market?

Answer 18

Food, shelter, automobiles, theater tickets, and clothing are among the many goods and services sold in product markets.

Question 19

What is a financial market?

Answer 19

The financial markets channel savings to

those individuals and institutions needing more funds for spending than are provided by their current incomes.

Question 20

What is savings?

Answer 20

(1) Households, savings are what is left from
current income after current consumption expenditures and tax payments are made.
(2) Business savings include current earnings retained inside business firms
after payment of taxes, stockholder dividends, and other cash expenses. (3) Government
savings arise when there is a surplus of current revenues over current expenditures in
a government’s budget.

Question 21

Three types of savings

Answer 21

Personal, Business, Government

Question 22

What is Investment?

Answer 22

Investment generally refers to the acquisition of capital goods, such as buildings and equipment, and the purchase of inventories of raw materials and goods
to sell.

Question 23

Business Investment

Answer 23

For a business firm, expenditures on capital goods (fixed assets, such as buildings and equipment) and inventories (consisting of raw materials and goods offered for sale) are investment expenditures.

Question 24

The global financial system has 7 basic economic functions that create a need for the money and capital markets.

Answer 24

Savings, wealth, liquidity, credit, payments, risk protection, and policy function.

Question 25

What is net worth?

Answer 25

True measure of a household’s wealth is its net worth, or its assets minus its liabilities.

Question 26

What is the money market?

Answer 26

Designed for making short-term loans. It is the institution through which individuals and institutions with temporary surpluses of funds meet the needs of borrowers who have temporary funds shortages (deficits). Thus, the money market enables economic units to manage their liquidity positions. (less than a year)

Question 27

What is the capital market?

Answer 27

Designed to finance long-term investments by
businesses, governments, and households. Trading of funds in the capital market
makes possible the construction of factories, highways, schools, and homes. Financial
instruments in the capital market have original maturities of more than one year and
range from all sizes.